Back To The Futures

Futures' Past

There's a lot more to futures than pork bellies, coffee and frozen orange juice. The trading of futures on various types of commodities has long been part of the economic scene. In 1848, 82 merchants founded the Chicago Board of Trade (CBOT). Prior to this time, there was no organized market in which farmers could sell their products and no commonly accepted weighing, measuring or grading procedures. Supplies of agricultural commodities were either too large or too small, and consumers were at the mercy of merchants, who were themselves subject to the whims of Mother Nature.

Soon after the founding of the CBOT, so-called "to arrive" contracts came into use. These contracts enabled merchants and others to contract for "forward" purchases and sales. Thus, a continuous market was developed for farmers' grain whether storage silos were full or empty. Speculators helped the market remain liquid, buying grain when supplies exceeded demand, hoping to make a profit if prices rose. They also sold grain when buyers needed a firm price, hoping to buy later when prices had declined. Such actions decreased commodity price volatility. These forward contracts were eventually refined into the futures contracts traded today.

Other types of commodities on which futures are traded include energy (crude oil, natural gas, heating oil and unleaded gas), metals (gold, silver, aluminum, platinum, copper and lead), interest rates, stock indices and currencies.

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This article was originally published in the August 1998 print edition of Entrepreneur with the headline: Back To The Futures.

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